The preamble of the Protocol on Economic Relations between the Government of the State of Israel and the PLO, signed on May 4, 1994, states:

This protocol lays the groundwork for strengthening the economic base of the Palestinian side and for exercising its right of economic decision making in accordance with its own development plan and for exercising its right of economic decision making in accordance with its own development plan and priorities.” [1]

Policymakers and economists who have lauded the “peace process” agree that national sovereignty in economic decision-making is an important prerequisite to political independence. It is becoming increasingly clear, however, that the Palestinians still do not have control over their economy. These same policymakers and development specialists who praise the “peace process” have failed to address or protest the problems which the Israeli government continues to create for Palestinian leaders.

What economic stability and policy options do the economic protocols offer the Palestinians? There is a world of difference between the rhetoric of the documents and the facts on the ground. While the protocols pay lip service to the independent decision-making and development planning of Palestinian policymakers, facts on the ground show that Palestinian economy remains completely under the control of the Israelis. This economic reality in Palestine is shaped by two factors: the interdependence of the Palestinian and Israeli communities and the power imbalance, favoring the Israelis.

An examination of current employment patterns and Israel’s continued control of the borders illustrates how Israeli policies have severely limited Palestinian policy options, thus hindering economic growth and employment creation.

Employment and Growth

The Israeli government has severely reduced Palestinian access from the West Bank and Gaza Strip to the Israeli labor market. Instead, workers are imported from as close as Lebanon and as far away as Thailand. This policy, ostensibly enforced due to Israeli security concerns, is an example of the power inequities which exist between the two groups and illustrates one way in which the Israeli government is destabilizing an already fragile Palestinian economy. By cutting Palestinian employment in Israel from 116,000 to 29,500 jobs in the last three years, Israeli policy has seriously increased Palestinian unemployment. Given that between 33 and 50 percent of male workers were dependent on Israeli industries, [2] Palestinian policymakers now face an extremely challenging economic problem.

Estimates of unemployment from 1995 to 1996 ranged from 31 to 74 percent in the Gaza Strip and 13 to 50 percent in the West Bank. [3] Official unemployment estimates (the lower figures) should be considered very conservative measures of unemployment, given that they do not take into account frequent closures and that much of the employment in the region is in fact underemployment, where workers are unable to work as many hours as they wish and therefore earn very low weekly wages. Such high levels of under and unemployment are considered intolerable by most countries. Palestinians, however, have been forced to accept such unemployment rates, because of the restrictions that Israel has placed on mobility of the Palestinian labor force, not only to enter Israel, but also to move around within Palestine (from the Gaza Strip to the West Bank, the southern West Bank to the northern West Bank, and access to Jerusalem).

Trade and Border Controls

Article VII of the 1994 agreement states that “both sides will attempt to maintain the normality of movement of labor between them.” [4] Israel has ignored this clause in the agreement, repeatedly closing the borders and restricting labor mobility between the two regions. During the Gulf war, Israel began systematically restricting Palestinian access to Jerusalem. These restrictions, never fully lifted, have become increasingly severe since the signing of the agreements. In reality Israel has almost complete control over the movement of labor and has no qualms about restricting the access of Palestinians to work inside Israel.

By restricting entry of Palestinians into Israel while at the same time importing foreign workers from Thailand, Romania and other countries, Israeli policymakers are further destabilizing an already precarious employment situation. Decreasing access to Israel and replacing workers has two effects. First, it allows Israel to become less dependent on Palestinian labor, and although this reduces the interdependence between the two economies, the benefits accrue primarily to Israel while the costs rest squarely on the shoulders of the Palestinian workers. When the borders between the two were more porous, at least many Palestinians had access to the Israeli market and could get some kind of daily labor. Palestinians are now in an even more precarious position, since it is much more difficult to participate in the informal and formal employment sectors. Palestinians provide an emergency labor force, to be exploited when needed by Israel, but entitled to no rights or employment stability.

Secondly, the increased unemployment in tum increases the power of local and international capital, by putting extreme downward pressure on local wages. As workers suffer increased levels of unemployment, wages are driven down and workers’ already fragile bargaining power is further eroded.

The problem of unemployment is made even worse by collective punishments, such as military closures, which may be either universally or locally enforced. For example, Hebron is under curfew almost every Friday, because of the military’s protection of settlers’ access to prayer. This reduces potential work hours for Palestinians in Hebron. Closures of the entire region also have devastating effects on the Palestinian economy. The World Bank estimated that each day of closure during the Gulf war cost the Gaza Strip and the West Bank $2.65 million, or about 25 percent of their daily national income. [5]

In addition to control over the movement of Palestinian workers, Israel also controls the movement of goods. This has had serious ramifications for the success of economic ventures. In a recent National Public Radio report, the owner of a soda bottling plant explained how Israeli restrictions on the movement of goods had led to a 70 percent drop in his market, which is restricted to the West Bank. Israeli policies not only keep Palestinian workers out of Israel, they also reduce local economic options. Palestinian communities in the West Bank, Gaza Strip, Jerusalem and Israel are increasingly isolated from each other, making integrated economic development efforts virtually impossible. The case of Jerusalem illustrates how this fragmentation has affected various aspects of Palestinian economy.

Wadi Nar

Skirting Jerusalem, from Bayt Sahour in the south to Ram in the north, a narrow asphalt trail winds through a steep canyon known as Wadi Nar (Valley of Fire). The grade of the road is steeper than safety measures allow and the road, a thin layer of asphalt laid rather precariously on the top soil, includes hairpin turns and minimal guard rails (hastily erected when international donors discovered the dangerous state of the road). This narrow road is now the only road available for the Palestinians in the West Bank to move between the areas north and south of Jerusalem. Residents of Hebron who work in Ramallah must use this treacherous road to get to work as do those from Ramallah and Nablus in the north with businesses in the southern regions of Bethlehem and Hebron. The road, not only a dangerous commute for Palestinians, symbolizes their lack of access to Jerusalem.

Since the Gulf war, Israel has maintained tight controls on Palestinian access to Jerusalem. At the moment very few Palestinians have permission to enter Jerusalem or Israel. Those who do have permission include day workers, particularly construction workers, who supply Israeli industries with a cheap source of labor, and a handful of non-governmental (NGO) workers, although even they have a hard time getting permission.

The Wadi Nar road connects the northern and southern parts of the West Bank but still does not address a much more important issue, namely the Israeli policy of denying Palestinian access to Jerusalem which has had a devastating impact on Palestinian economy.

Independent laborers and entrepreneurs, such as contractors, no longer have access to Jerusalem and the Israeli market, thus decreasing their employment and income generating options. This has been particularly difficult for small businesses and self-employed Palestinians, who in the past have been able to offer their services to Israelis and Jerusalem Palestinians. Larger companies are also severely restricted in their market access.

Merchants in Jerusalem have seen their business cut to a third of its former volume. In addition to weakening the Palestinian economy, this tactic is a not so subtle way of forcing Jerusalem Palestinians to abandon their claims to residency in Jerusalem, as their economic survival becomes threatened. By restricting employment options, Israel reduces income, which means that families can no longer consume as they used to, further hurting local business. This creates a multiplier effect — a cycle of fewer jobs and less income.

Economic Development

How can Palestinian policymakers address the problem of unemployment, stifled growth and restricted movement in both goods and humans? Ideally, they would target development projects toward various segments of the population to ensure better employment prospects for workers. But Article IX of the 1994 protocol states: “Each side will do its best to avoid damage to the industry of the other side and will take into consideration the concerns of the other side in its industrial policy.” [6]

If Palestinian entrepreneurs decide to develop a computer industry drawing on the local computer and engineering talents, will they be told that such economic developments would compete with the existing Israeli industry and therefore cannot go forward? Given Israel’s established economic clout and advantage in developing institutions, without any consideration of Palestinian economic activities, this provision masks the power imbalance that exists between Palestinians and Israelis.

The current development plans being put forth by the Local Aid Coordination Committee for Development Assistance in the West Bank and Gaza Strip consist of programs for agriculture, education, employment, the environment, health, infrastructure and housing, institution building, police and the private sector. These plans constitute Palestinian “fiscal policy,” in terms of government spending, designed to invigorate the Palestinian economy. Not addressed by the plans are political obstacles put in place by the Israeli government. In fact, the PA and donor countries are being forced to reassess their development programs in light of Israeli policies.

Stanley Fischer, a Harvard economist, recently pointed out that “if the Israelis do not permit significant inflows of Palestinian labor into Israel, growth will be severely set back.” [7] Given Israel’s intransigence on this issue and despite the cautious recommendation of Harvard economists, the Local Aid group has been forced to implement emergency employment programs. [8]

One of the World Bank’s major foci was to be the development of “industrial zones.” Industrial zones elsewhere in the world, such as in Mexico and the Philippines, have often resulted in low wages, high levels of pollution, low health and safety standards and job insecurity. The problematic questions surrounding the development of industrial zones aside, the irony in the Palestinian case is that “‘industrial zone’ development had almost disappeared from the core list” and there has been “serious concern over the Israeli confiscation of lands previously identified as potential industrial zone sites.” [9]

While Israel thwarts the development of industrial zones, the US is currently encouraging groups such as the Overseas Private Investment Company (OPIC) to invest in the Palestinian economy. Ruth Harkin, president of OPIC, “explains how US midsized multinationals can take advantage of [OPIC] programs.” [10] “The key,” she points out, “is not only to create stability in politically unstable areas of the world and help nurture economic development, but also to create American jobs.” In Palestine, OPIC has ”financed five projects, including a chain of hotels.” At the same time, these projects include insurance against expropriation and other political risks.

Is this kind of investment the best strategy for the Palestinian population? Many skilled and educated Palestinians are currently working in jobs which do not use their skills and training. School teachers, for instance, may be working in the construction industry, engineers as day laborers, and so on. The current development plan, as envisioned by Harkin, fails to address this problem.

The successful development of these policies requires the large-scale importation of international capital, usually under the auspices of transnational corporations. By replacing Israeli capital with international capital, this solution would perpetuate the continued reliance of Palestinians on outside capital.

One alternative to international capital is investment by diaspora Palestinians, but this has been disappointingly low due to the high risk involved in opening businesses in the region. Another issue is how indigenous Palestinian investors will be able to compete with US investors who, backed by the US government, are offered risk guarantees which are far better than guarantees offered local entrepreneurs. Given that Israeli policies have continued to include land confiscation and border closures, diaspora Palestinians are hesitant to surrender their economic security into the hands of the Israelis. The PA must also bear some responsibility for low investment by diaspora Palestinians. The complicated bureaucratic regulations being established for potential investors make it difficult to justify such economic initiatives.

While economic aid is being pumped into the region, much of it is in the form of loans, that must be repaid. The World Bank and the IMF have a history of extending large loans to developing countries. These governments fall into severe debt, and the loaning institutions then impose structural adjustment policies. Despite their need for capital, the PA must avoid becoming dependent upon large loans, which, while relieving economic conditions in the short run, will lead to the eventual imposition of similar structural adjustment policies.

Before continuing this untenable economic plan, the international community must take into account the inherent power inequities between Israeli and Palestinian policymakers. Until now, however, international donors have avoided challenging Israeli policies preferring instead a patchwork of stopgap measures intended to correct Israeli human and property rights abuses.


[1] Preamble of the “Protocol on Economic Relations,” Annex IV in the Agreement on the Gaza Strip and the Jericho Area, Cairo, May 4, 1994.
[2] See Jennifer Olmsted, Education and Migration of Bethlehem Area Palestinians, Ph.D. dissertation, University of California-Davis, 1994; Sara Roy, The Gaza Strip: The Political Economy of De-development (Washington, DC: Institute for Palestine Studies, 1995); and the International Bank for Reconstruction and Development, Developing the Occupied Territories: An Investment in Peace (Washington, DC: World Bank, September 1993).
[3] Sara Roy, “Economic Deterioration in the Gaza Strip,” Middle East Report 200 (July-September 1996), and Local Aid Coordination Committee, Partners in Peace (United Nations and World Bank, July 1996), p. 80.
[4] Article VII/I of the “Protocol on Economic Relations,” Annex IV in the Agreement on the Gaza Strip and the Jericho Area, Cairo, May 4, 1994.
[5] International Bank for Reconstruction and Development, Developing the Occupied Territories: An Investment in Peace (Washington, DC: World Bank, September 1993), p. 10.
[6] Article IX/3 of the “Protocol on Economic Relations,” Annex IV in the Agreement on the Gaza Strip and the Jericho Area, Cairo, May 4, 1994.
[7] “Economic Transition in the Occupied Territories,” Journal of Palestine Studies 23/4 (Summer 1994), p. 54.
[8] See Partners in Peace, which lists all the ongoing and planned spending projects in the region. On p. 80 of the document is an explanation of how the increased unemployment has been dealt with through the introduction of emergency employment programs.
[9] See Partners in Peace, p. 186.
[10] Lori Ioannou, “Clinton’s Third World lnvestment Emissary,” International Business (December 1994), p. 33.

How to cite this article:

Jennifer Olmsted "Thwarting Palestinian Development," Middle East Report 201 (Winter 1996).

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